Property Ownership Rights of Foreigners in Bali, Indonesia
A Guide to the Bali Property Market Part 1.
Bali, Indonesia is a tropical paradise that attracts millions of tourists each year. With its beautiful beaches, lush jungles, and vibrant culture, it's no wonder many foreigners are interested in purchasing a property in Bali as an investment asset, a second home or both. In this post, we'll take a look at the ownership options available for foreigners who want to invest in Bali's real estate market.
To better understand property ownership in Indonesia, let's first examine how property ownership generally operates on a global scale. Across the world, the two most common forms of property ownership are freehold and leasehold. Freehold ownership grants absolute and indefinite ownership of a property or a piece of land, while leasehold ownership provides the owner with the rights to the property for a fixed period of time, which can range from a few years to several decades. Many countries have both forms of property ownership.
In the UK, for instance, leasehold ownership is very common, particularly for flats and apartments where the freehold of the property is owned by a landlord. Under a leasehold arrangement in the UK, a leaseholder owns the rights to a property for 99 to 125 years. Leasehold ownership is also present in the US, although it is less common than in the UK, and leasehold rights can range from a few years to several decades.
Freehold ownership is what most people expect when they purchase a property. However, because leasehold rights can extend over several decades, some leaseholders can mistake leasehold ownership for freehold ownership.
Now, turning to property ownership in Indonesia. Freehold and leasehold ownership are both common forms of property ownership in Indonesia, in addition to a third form of ownership that shares similarities with leasehold ownership. However, there are limitations on which ownership rights foreigners are permitted to acquire. In the following sections, we will explore these three forms of property ownership in Indonesia.
1. Freehold or “Hak Milik”
In Indonesia, freehold ownership rights are restricted to Indonesian citizens only. To circumvent this restriction, many foreigners have acquired freehold property using an Indonesian nominee who acts on their behalf to obtain the freehold title. However, this approach should be avoided since the nominee legally holds full ownership of the property and has the power to claim the property at any time.
2. Leasehold or “Hak Sewa”
Leasehold ownership in Indonesia is available to both Indonesian citizens and foreigners. Foreigners can even acquire leasehold properties without any residency status in Indonesia. This arrangement involves an Indonesian freehold landowner leasing their land or property to a buyer, who pays the landowner for the initial lease period and each time they wish to extend the lease. Leasehold rights in Indonesia are executed before a notary and have strong legal protection for the leaseholder. During the leasehold period, the leaseholder has virtually the same rights as a freehold landowner, including the ability to sell or bequeath the leasehold right as an inheritance.
In Bali, leasehold agreements are typically for 25 to 30 years and can be extended by purchasing additional years from the freehold owner. While there are no legal restrictions on the duration of leaseholds, it is common practice to extend them to maintain the duration at 25 years. Some leaseholders aim to extend their leases every few years, while others top up the leasehold duration back to 25 years only when they are ready to sell the leasehold property to capture its full value in the selling price.
One major advantage of leaseholds in Indonesia is their affordability, with typical prices ranging from a third to a fourth of the cost of a freehold property. This makes leasehold ownership an attractive option for investors seeking higher ROI while enjoying most of the benefits of freehold ownership. As a result, leasehold ownership is the most popular form of property ownership among foreigners in Indonesia.
3. Right to Use or “Hak Pakai”
Hak Pakai is another ownership right available to foreigners in Indonesia– it is virtually identical to another form of ownership known as the Right to Build (“Hak Guna Bangunan” or HGB). To keep things simple, we will only refer to Hak Paki in this section.
When a freehold property is sold to a foreigner, it must be converted to Hak Pakai ownership and if the Hak Pakai property is sold back to an Indonesian, it reverts back to freehold ownership. Hak Pakai ownership shares similarities to leaseholds as ownership is not indefinite and must be extended. This title grants ownership rights for an initial period of 30 years and can be extended for 20 years, and then renewed for a maximum period of 30 years, corresponding to a total ownership period of 80 years.
When an Indonesian sells their freehold land or property as Hak Pakai, they are effectively giving up all rights to that property. As a result, extensions of a Hak Pakai ownership are done through the government by submitting an application to the National Land Agency and paying the appropriate extension administration fees – unlike in leasehold extensions where the leaseholder pays the freehold owner for extensions. Hence, extensions of Hak Pakai are administrative processes with the government and unlike leaseholds, are not dependent on negotiating with a freehold owner or on the market price of the land at the time of extending.
However, acquiring property in Indonesia through Hak Pakai can be a more arduous and costly process for foreigners due to several factors:
First, foreigners need to establish an Indonesian limited liability company (known as a PTPMA) in order to obtain the Hak Pakai property. This form of ownership cannot be obtained under a foreign individual's name, unlike leaseholds.
Second, a minimum investment of 10 billion IDR (approximately USD $660,000) is required for the foreign-owned PTPMA.
Third, maintaining the PTPMA in Indonesia involves ongoing compliance administration and costs that are legally required for companies.
Lastly, purchasing land or property under the Hak Pakai title tends to be 3-4 times more expensive than purchasing a leasehold, resulting in longer payback periods.
Despite these challenges, some foreigners still find the predictability offered by Hak Pakai ownership extensions to be a viable option.
No matter which ownership method you select, the value of working with a professional who can provide guidance throughout the process cannot be overstated. Many foreign buyers who attempt to purchase land and property in Indonesia without proper due diligence fall prey to common pitfalls. Beyond ownership rights, there are numerous other factors to consider, such as land zoning and permitted activities, to ensure that the property can be used for its intended purpose. At Mazari Villas, we not only ensure a seamless and stress-free purchasing process, but also guide and advise you on all aspects of your investment asset, so you are fully informed.